Warning sounded over China’s ‘debtbook diplomacy’

China’s “debtbook diplomacy” uses strategic debts to gain political leverage with economically vulnerable countries across the Asia-Pacific region, the US state department has been warned in an independent report.

The academic report, from graduate students of the Harvard Kennedy school of policy analysis, was independently prepared for the state department to view and assessed the impact of China’s strategy on the influence of the US in the region.

The paper identifies 16 “targets” of China’s tactic of extending hundreds of billions of dollars in loans to countries that can’t afford to pay them, and then strategically leveraging the debt.

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It said while Chinese infrastructure investment in developing countries wasn’t “inherently” against US or global interests, it became problematic when China’s use of its leverage ran counter to US interests, or if the US had strategic interests in a country which had its domestic stability undermined by unsustainable debt.
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The academics identified the most concerning countries, naming Pakistan and Sri Lanka as states where the process was “advanced”, with deepening debt and where the government had already ceded a key port or military base, as well places including Papua New Guinea and Thailand, where China had not yet used its amassed debt leverage.

Papua New Guinea, which “has historically been in Australia’s orbit”, was also accepting unaffordable Chinese loans. While this wasn’t a significant concern yet, the report said, the country offered a “strategic location” for China, as well as large resource deposits.

While there was a lack of “individual diplomatic clout” in Cambodia, Laos and the Philippines, Chinese debt could give China a “proxy veto” in Asean, the academics said.

They also warned that the 2023 expiration of the compact of free association between Micronesia, Palau and the Marshall Islands could “threaten the unfettered basing access and right of strategic denial the US has enjoyed since world war two, and help the Chinese navy extend its reach past the first island chain into the blue-water Pacific”, it said.

China’s methods were “remarkably consistent”, the report said, beginning with infrastructure investments under its $1tn belt and road initiative, and offering longer term loans with extended grace periods, which was appealing to countries with weaker economies and governance.

Construction projects, which the report said had a reputation for running over budget and yielding underwhelming returns, make debt repayments for the host nations more difficult.

“The final phase is debt collection,” it said. “When countries prove unable to pay back their debts, China has already and is likely to continue to offer debt-forgiveness in exchange for both political influence and strategic equities.”

As a case study, the report cited specific concerns about Sri Lanka granting China an 85% stake in a 99-year lease on a major port in Hambantota.

The deal, which the report described as “opaque and contentious”, came after a decade of deepening debt ties with China. In 2007 China offered financing for the $361m port at a time when other entities were concerned about human rights and commercial viability, and then loaned a further $1.9bn for upgrades and an airport.

By 2017, when the port deal was signed, Sri Lanka owed more than $8bn to Chinese-controlled firms. The port, which was yet to generate a profit, became a “debt trap”.

“Once Sri Lanka made the initial commitment, the sunk cost and need to generate profit to pay off the original loans drove it to take out additional loans, a cycle that repeated itself until it was finally cornered into giving up the port in a debt-for-equity swap,” it said.

“This has sparked fears that Hambantota could one day become a Chinese naval hub, and sent a worrying signal to other debt-strapped developing nations.”

China has invested in or financed infrastructure developments across the Asian and Pacific regions, including large-scale projects representing sizeable portions of host nations’ GDP. The loans often require that Chinese companies build the projects, and complaints that locals are overlooked for a fly-in Chinese workforce are frequent.

It has also sought to expand its military presence, prompting warnings for nearby countries including Australia. Australia’s major parties have also voiced concernabout the country’s diminishing influence in the Pacific.

The report recommended that the US target and streamline its investments, strengthen alliances and manage debt burdens, including through bolstering India’s role as a regional leader.

Last year India warned against China’s expanding BRI and urged financial responsibility with projects that didn’t create “unsustainable debt burden for communities”.

Beijing said in response that the initiative “is not and will never be neocolonialism by stealth”.

“Nor will China use the success of the initiative to undermine the influence of others and jeopardise the regional stability upon which the nation’s astonishing successes have been built.”